A study conducted by the University of Cambridge and Nesta, in partnership with KPMG, recently covered the development of the alternative finance industry in the United Kingdom. In the U.K., the industry expanded by 84% in 2015 £3.2 billion, and equity based crowdfunding was 15.6% of the total amount of seed and venture stage equity investment in the United Kingdom.
The fastest growing models of alternative finance investment are donation-based and equity-based crowdfunding, which grew by 507% and 295% respectively from 2014 to 2015. Alternative finance has also touched the real estate market, where the combined debt and equity based funding for real estate in 2015 has totaled almost £700 million pounds, resulting in it being the most popular sector.
There are high risks that are associated with the alternative finance industry, but regulators in the United Kingdom are beginning to question if private investors are aware of the risks involved. A major source of concern is the resilience of alternative investment market if UK’s economy was to enter a recession. United Kingdom’s Financial Conduct Authority, in charge of regulations in the finance industry, reviewed peer-to-peer lending and equity crowdfunding, two major types of investments that are under the umbrella of alternative finance.
The main differentiation between the two forms is that peer-to-peer (P2P) is an investment based on debt involving online platforms that match investors to interest-paying borrowers, but equity crowdfunding is when investors buy equity stakes in small, unlisted companies. P2P lending has grown far more quickly, and through hedge fund managed investment trusts, has attracted more institutional capital compared to crowdfunding. P2P lending is also seen to be more safe as it is a debt-based investment and isn’t as exposed to volatility in the equity markets.
Two of the other major risks of continued growth in the industry are malpractice and cybersecurity. Over 50% of the platforms that were surveyed saw the collapse of another well-known platform because of malpractice and 51% of the surveyed platforms consider cybersecurity as a factor that can negatively impact the industry.